The Investing Sweet Spot: 5- to 12-Unit Properties are a Wealth of Opportunity

The real estate market has trends like any other market, fluctuating up and down. Anyone paying attention can see this, which is why every real estate investor should always keep a close eye on it. More than just understanding the trends, the goal is to spot what’s overlooked. Seeing what others don’t means finding hidden value!

Today, one such area of hidden value is in multi-unit complexes—specifically those offering between 5 and 12 units. More than just an overlooked area of the residential real estate market, they’re right in the sweet spot that fits the serious individual investor’s needs. In this post we’ll explain why.

The market for large complexes is too expensive

Today, real-estate syndicates spend most of their money on multi-family complexes. They deal in large sums and cannot afford to let those funds sit unused. As such, they're buying up large swaths of the market.

As a result, big buyers have priced out individual investors. They have various schemes for keeping their costs low and turning a profit—gradual improvements to property, regular rent increases and tapping into economies of scale. Sometimes, they’re even able to keep the property staff. Big investors pay more up front. But, they are looking for passive investments, which means safe and low-maintenance.

The market for single-family homes is complicated

Single-family homes are a long-term investment. You see most of your profit from the sale of your home. The benefits of investing in single-family homes are:

•You collect higher individual rents.

•Your renters are, on average, higher-income and less likely to damage or vacate early.

However, you don't get much cash flow from a single home. Average rent is correlated with average mortgage costs. So, if you want income-level cash flow, you may need a dozen properties or more.

5- to 12-unit properties are the sweet spot

5- to 12-unit properties have the most utility and value for an average investor. You'll collect more rent than from a similar investment in single-family homes, while finding properties under the radar of larger investment firms.

There is less competition with big buyers. As mentioned, larger investors tend to pass on these complexes. Real estate syndicates often own property all over the world. Attending to them on such a small scale makes their investments too complex. This is the one market where smaller, local owners actually have the upper hand.

These properties demand a hands-on owner. While big buyers can't afford to be hands-on, you can. You know the area and can drive to your property when required. And, you know the best service providers in town. As such, these properties are more valuable to you than to a real estate syndicate. And, luckily, they're much cheaper too!

Commercial property is appraised differently. When a building has five or more units, it’s considered commercial property. As an appraiser tries to gauge the market value of the property, potential cash flow is usually factored in. If you end up refinancing later with a more consistent cash flow from renters, you'll get an even more favorable appraisal and valuation.

Some words of caution

If you’re thinking about jumping into a 5- to 12-unit rental for the first time, take a moment to appreciate some of the challenges you’ll face. The biggest, is collecting rent from each tenant.

Keep in mind, apartments have higher rates of skipped rent and eviction than single-family homes. But, that's part of the bargain. If you have good processes and a team that knows what it's doing, you'll be fine.

A good management company can also help keep vacancies low and ensure rent is paid, if you don’t mind sacrificing a small percentage of your profits. You can keep costs low by buying several of these complexes in the same area. Then, you can negotiate better deals with management and service providers. At this point, a good management company just might pay for itself.

Think big, invest medium, keep costs small

Small real estate investors have been priced out of larger multi-family complexes. It may be frustrating, but being priced out is a blessing. You're not going to waste your money on properties with low returns and high costs.

If you can deal with the complexity (which you can), investing in medium-sized complexes is the way to go. As always, we encourage you to think and search locally. Your greatest advantage is your local knowledge. Turn that to your advantage by investing in the sweet spot of real estate investing: The 5- to 12-unit complex.